NEW YORK  Theres a way for consumers to put aside money to cover some of their health care and child care costs  and save on taxes.

Eileen Alt Powell

Published 12:00 am, Monday, October 20, 2003

Its done through flexible spending accounts, offered by three-quarters of the nations largest companies and many smaller ones, too, according to a recent study by the Kaiser Family Foundation.

Most companies have enrollment periods for FSAs in the fall, with implementation effective Jan. 1.

The way FSAs work is that an employee agrees to set aside a specified amount of his or her salary  say, $1,000 for medical costs not covered by the employees health insurance or $2,000 for child care expenses. Workers taxable income is then reduced by that amount, saving them money at tax time.

"If you have out-of-pocket costs youre going to pay anyway, you can pay with pretax dollars," said Gary Claxton, a vice president at the Kaiser Family Foundation in Menlo Park, Calif. "Thats not a trivial difference."

Claxton said workers not already enrolled in FSA programs should consider signing up now, especially since many companies are raising the copayments and deductibles families must cover when visiting doctors or buying prescription drugs. An FSA can be used to pay for both.

"Take a look, and if youre spending a few hundred dollars on prescription drugs or copays and deductibles, go ahead and take advantage of it," Claxton advised.

Theres no federally set maximum on the health care accounts, but many companies set limits of $2,000 or $5,000, said Edward Pudlowski, a partner with Ernst & Youngs human capital practice in Dallas.

Thats in part to protect employees from the governments "use it or lose it" rules, which require that employees forfeit any money left in FSA accounts at years end.

The federal limit for dependent care accounts is $5,000, he said.

Not only can these accounts be used for day care and preschool expenses for children, they also can be spent for a spouse who is physically or mentally incapacitated, or for parents who live with an adult child and are financially dependent.

Pudlowski said that "many of our clients put together worksheets to help employees calculate how much they want to set aside."

New this year is that FSAs can be used not only to defray the cost of prescription drugs but also some nonprescription drugs, such as antacids, allergy medicines, pain relievers and cold medicine, said Bob D. Scharin, a tax attorney who edits the RIAs Practical Tax Strategies newsletter.

"The IRS said that one reason for changing their position is that so many drugs have been reclassified as nonprescription," Scharin said. For example, the widely used allergy medicine Claritin started selling over-the-counter last year, while Prilosec, an anti-ulcer medicine, became available without prescription earlier this year.

There remains some confusion, however, over whats covered, he said. Weight-loss products or vitamins probably arent unless specifically prescribed by a doctor, he said.

"If consumers have questions, they should ask their plan administrator or human resources department," he said.

Scharin also pointed out that in addition to health care and dependent care flexible spending accounts, there are similar accounts for workers to use pretax dollars to cover transportation and parking costs.

These allow employees to allocate up to $100 each month for mass transit tickets or $190 a month for parking at work, and the funds can be held over month-to-month if theyre not used up.

"Theyre not technically flexible spending accounts but from the consumers point of view, the tax effect is the same," Scharin said.